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July 29, 2016

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China urged to close ‘zombie’ firms

AROUND 7.51 percent of China’s industrial businesses are “zombie companies,” according to a recent research paper, which recommended deregulation to allow them to perish.

“Zombie companies” are economically unviable businesses, usually in industries with severe overcapacity, kept alive only with aid from the government and banks.

A report released by Renmin University of China found that in 2000, about 30 percent of industrial firms were “zombies.” During 2005-2013, they represented around 7.51 percent.

Compiled on the basis of a survey of roughly 800,000 companies, the report said zombie firms are more prevalent in underdeveloped western and northeastern China. State-owned enterprises and large and medium-sized companies have the highest ratio of zombie firms.

The report asked the government to reduce regulation and be more cautious in applying industrial policies. Banks should be free from administrative influence when making lending decisions.

Nie Huihua, an economics professor at Renmin University of China and a key author of the report, said the government should keep policy consistent to eliminate the companies’ hopes of receiving policy support in the future.

“Zombie companies” have become a problem in China as the country battles severe overcapacity in key industrial sectors such as steel and coal.

Analysts said streamlining zombie firms could raise fears about jobs in the short run, but closing them is vital to China’s long-term economic health.


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